<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from                        to
                               ----------------------    ----------------------

                         Commission File Number: 0-19594

                          INSURANCE AUTO AUCTIONS, INC.
                          -----------------------------
             (Exact name of registrant as specified in its charter)

Illinois                                                             95-3790111
-------------------------------------------------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

850 East Algonquin Road, Suite 100, Schaumburg, Illinois             60173-3855
-------------------------------------------------------------------------------
(Address of principal executive offices)                             (Zip Code)

                                 (847) 839-3939
-------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                                               [X] Yes   [ ] No


                      APPLICABLE ONLY TO CORPORATE ISSUERS

Number of shares outstanding of each of the issuer's classes of common stock,
as of July 31, 2002:

                 Class                               Outstanding July 31, 2002
                 -----                               -------------------------

     Common Stock, $0.001 Par Value                      12,240,899 shares


<PAGE>



                                      INDEX

                          INSURANCE AUTO AUCTIONS, INC.

                                                                    PAGE NUMBER
                                                                    -----------

PART I.  FINANCIAL INFORMATION.....................................      3

Item 1.  Financial Statements (Unaudited)..........................      3

         Condensed Consolidated Statements of Operations for the
              Three Month and Six Month Periods ended June 30,
              2002 and July 1, 2001................................      3
         Condensed Consolidated Balance Sheets
              as of June 30, 2002 and December 30, 2001............      4
         Condensed Consolidated Statements of Cash Flows for the
              Six Month Periods ended June 30, 2002 and
              July 1, 2001.........................................      5
         Notes to Condensed Consolidated Financial Statements......      6

Item 2.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations..................      9
         Overview..................................................      9
         Critical Accounting Policies..............................      9
         Results of Operations.....................................     10
         Financial Condition and Liquidity.........................     12
         Factors That May Affect Future Results....................     12

Item 3.  Quantitative and Qualitative Disclosures about
           Market Risk.............................................     15

PART II. OTHER INFORMATION.........................................     16

Item 1.  Legal Proceedings.........................................     16

Item 2.  Changes in Securities.....................................     16

Item 3.  Defaults upon Senior Securities...........................     16

Item 4.  Submission of Matters to a Vote of Security Holders.......     16

Item 5.  Other Information.........................................     16

Item 6.  Exhibits and Reports on Form 8-K..........................     16

Signatures.........................................................     17


                                       2


<PAGE>




                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands except per share amounts)

<TABLE>
<CAPTION>
                                            THREE MONTH PERIODS ENDED      SIX MONTH PERIODS ENDED
                                            -------------------------     -------------------------
                                            JUNE 30,          JULY 1,     JUNE 30,     JULY 1,
                                             2002              2001        2002       2001
                                            -------------------------     -------------------------
                                                   (UNAUDITED)                   (UNAUDITED)
<S>                                         <C>              <C>          <C>              <C>
Revenues:
     Vehicle sales                          $ 17,059         $ 36,942     $ 44,810         $ 77,159
     Fee income                               42,691           38,572       84,160           76,199
                                            --------         --------     --------         --------
                                              59,750           75,514      128,970          153,358
Cost of sales:
     Vehicle cost                             14,802           34,727       40,859           71,919
     Branch cost                              33,001           28,896       64,193           58,040
                                            --------         --------     --------         --------
                                              47,803           63,623      105,052          129,959
                                            --------         --------     --------         --------
         Gross profit                         11,947           11,891       23,918           23,399

Operating expense:
     Selling, general and administrative       6,870            6,965       13,982           14,121
     Amortization of intangible assets            67            1,005          134            2,011
     Business transformation costs             2,237               84        4,186               84
     Special charges                               -                -            -            6,047
                                            --------         --------     --------         --------

     Earnings from operations                  2,773            3,837        5,616            1,136

Other (income) expense:
     Interest expense                            476              456          724              912
     Interest income                             (82)            (315)        (139)            (683)
                                            --------         --------     --------         --------

     Earnings before income taxes              2,379            3,696        5,031              907

Provision for income taxes                     1,023            1,525        2,163              381
                                            --------         --------     --------         --------

         Net earnings                       $  1,356         $  2,171     $  2,868         $    526
                                            ========         ========     ========         ========

Earnings per share:
     Basic                                  $    .11         $    .18     $    .23         $    .04
                                            ========         ========     ========         ========
     Diluted                                $    .11         $    .18     $    .23         $    .04
                                            ========         ========     ========         ========

Weighted average shares outstanding:
     Basic                                    12,226           11,792       12,212           11,761
     Effect of dilutive securities -
         stock options                           357              148          305              208
                                            --------         --------     --------         --------
     Diluted                                  12,583           11,940       12,517           11,969
                                            ========         ========     ========         ========

Other data
         Gross proceeds                     $196,016         $171,632     $391,152         $343,454
                                            ========         ========     ========         ========

</TABLE>


See accompanying notes to condensed consolidated financial statements.

                                       3


<PAGE>


                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (in thousands except share and per share amounts)

                                              JUNE 30,           DECEMBER 30,
                                                2002                 2001
                                            ------------         ------------
ASSETS                                       (Unaudited)

Current assets:
     Cash and cash equivalents              $     18,649         $     24,467
     Accounts receivable, net                     43,319               54,674
     Inventories                                   9,129               13,505
     Short-term investments                            -                2,131
     Other current assets                          3,302                4,165
                                            ------------         ------------
         Total current assets                     74,399               98,942
                                            ------------         ------------

Property and equipment, net                       43,614               39,240
Deferred income taxes                              7,686                7,827
Investments in marketable securities                   -                  512
Intangible assets, net                             1,483                1,617
Goodwill, net                                    129,603              129,522
Other assets                                         135                  544
                                            ------------         ------------

                                            $    256,920         $    278,204
                                            ============         ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                       $     33,039         $     41,451
     Accrued liabilities                          10,922               10,920
     Accrued special charges                       1,025                1,245
     Obligations under capital leases                782                    -
     Current installments of long-term debt           42               20,040
                                            ------------         ------------
         Total current liabilities                45,810               73,656
                                            ------------         ------------

Deferred income taxes                             13,436               12,172
Other liabilities                                  3,484                3,279
Obligations under capital leases                   1,455                    -
Long-term debt, excluding current
     installments                                     81                  103
                                            ------------         ------------
         Total liabilities                        64,266               89,210
                                            ------------         ------------

Shareholders' equity:
Preferred stock, par value of $.001 per share
     Authorized 5,000,000 shares;
         none issued                                   -                    -
Common stock, par value of $.001 per share
     Authorized 20,000,000 shares; issued
     and outstanding 12,232,459 and
     12,162,290 shares as of June 30, 2002
     and December 30, 2001, respectively              12                   12
Additional paid-in capital                       143,476              142,575
Accumulated other comprehensive loss                (109)                   -
Retained earnings                                 49,275               46,407
                                            ------------         ------------
         Total shareholders' equity              192,654              188,994
                                            ------------         ------------

                                            $    256,920         $    278,204
                                            ============         ============

See accompanying notes to condensed consolidated financial statements.

                                       4


<PAGE>


                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)

                                                    SIX MONTHS ENDED
                                              JUNE 30,              JULY 1,
                                               2002                  2001
                                            ------------         ------------
Cash flows from operating activities:                  (Unaudited)
Net earnings                                $      2,868         $        526
Adjustments to reconcile net earnings to
   net cash provided by operating
   activities:
     Depreciation and amortization                 4,275                4,975
     Loss (gain) on disposal of fixed assets          34                 (388)
     Loss on change in fair market value
         of derivative                               472                    -
     Special charges                                   -                6,047
     Changes in assets and liabilities
     (net of effects of acquired companies):
     (Increase) decrease in:
       Accounts receivable, net                   11,355                2,756
       Inventories                                 4,376               (4,525)
       Other current assets                          863               (1,387)
       Other assets                                  438                   52
     Increase (decrease) in:
       Accounts payable                           (8,412)                 952
       Accrued liabilities                          (588)              (3,006)
       Deferred income taxes, net                  1,405                  549
                                            ------------         ------------
         Total adjustments                        14,218                6,025
                                            ------------         ------------

     Net cash provided by operating
         activities                               17,086                6,551
                                            ------------         ------------

Cash flows from investing activities:
   Capital expenditures                           (6,601)              (9,025)
   Investments, net                                2,643                3,188
   Proceeds from disposal of fixed assets            175                1,416
   Payments made in connection with
      acquired companies, net of cash
      acquired                                         -                 (105)
                                            ------------         ------------

      Net cash used in investing activities       (3,783)              (4,526)
                                            ------------         ------------

Cash flows from financing activities:
   Proceeds from issuance of common stock            901                2,931
   Principal payments on long-term debt          (20,022)                 (19)
                                            ------------         ------------

Net cash provided (used) by financing
     activities                                  (19,121)               2,912
                                            ------------         ------------

Net increase (decrease) in cash and
     cash equivalents                             (5,818)               4,937

Cash and cash equivalents at beginning
     of period                                    24,467               30,938
                                            ------------         ------------

Cash and cash equivalents at end of period  $     18,649         $     35,875
                                            ============         ============

Supplemental disclosures of cash flow
information:
   Cash paid or refunded during
   the period for:
     Interest                               $      1,077         $        860
                                            ============         ============
     Income taxes paid                             1,735         $          7
                                            ============         ============
     Income taxes refunded                  $      2,250         $          -
                                            ============         ============

 See accompanying notes to condensed consolidated financial statements.

                                       5


<PAGE>


                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.     GENERAL

       The unaudited condensed consolidated financial statements of Insurance
       Auto Auctions, Inc. and its subsidiaries (collectively, the "Company")
       have been prepared on the same basis as the annual audited consolidated
       financial statements and, in the opinion of the Company, reflect all
       adjustments (consisting of normal recurring adjustments, except as
       otherwise described in Note 2) necessary for a fair presentation for each
       of the periods presented. The results of operations for interim periods
       are not necessarily indicative of results for full fiscal years.

       As contemplated by the Securities and Exchange Commission ("SEC") under
       Rule 10-01 of Regulation S-X, the accompanying consolidated financial
       statements and related notes have been condensed and do not contain
       certain information that is included in the Company's annual consolidated
       financial statements and notes thereto. For further information, refer to
       the consolidated financial statements and notes thereto included in the
       Company's annual report on Form 10-K for the year ended December 30,
       2001.

       Fiscal year 2001 consisted of 52 weeks and ended December 30, 2001.
       Fiscal year 2002 will consist of 52 weeks and will end on December 29,
       2002.

       Certain reclassifications have been made to the prior year financial
       information to conform to the current year presentation.

       Beginning this year, the Company has adopted a new presentation format
       for the Condensed Consolidated Statement of Operations. The purpose of
       this change is to provide greater clarity to historic, current and future
       results. The primary change relates to the breakdown of the Company's
       cost structure among purchase agreement vehicle cost, branch cost and
       selling, general and administrative operating expenses. The cost of the
       purchase agreement vehicles sold during the period are presented in the
       vehicle cost component. Branch cost represents those expenses related to
       operating individual branches including towing, yard and office labor,
       branch management, real estate and other related expenses. Selling,
       general and administrative expenses are now presented separately as well.

2.     SPECIAL CHARGES

       During the first quarter 2001, the Company announced an organizational
       realignment and recorded special charges of $6.0 million. As part of this
       plan, the Company offered involuntary severance packages to approximately
       30 staff employees primarily located at its headquarters and recognized
       $2.4 million in employee termination benefits associated with this
       workforce reduction. The Company also recorded approximately $1.7 million
       related to the abandonment of certain facilities including cancellation
       of a planned expansion at its headquarters building. The remaining
       balance includes amounts related to repositioning the Company's towing
       operations and other restructuring charges.

       The Company also recorded special charges of $2.4 million in the fourth
       quarter of 2001, including the write-off of $1.4 million of unamortized
       leasehold improvements due to changes in the estimated useful lives of
       the assets. Also included was a $1.0 million write-off of amounts due
       from the Company's now bankrupt insurance carrier for damages sustained
       as a result of the airplane crash at the Company's Sacramento, California
       facility.

       During the fourth quarter of 2001, the Company reviewed the adequacy of
       its accruals for special charges. The facilities closing accrual was
       increased by $0.8 million. The accrual for workforce



                                       6


<PAGE>



       reduction was decreased by $0.4 million and the accrual for the towing
       operations and other charges was decreased by $0.8 million. The
       changes in the accruals for special charges related to the
       organizational realignment are summarized below.

<TABLE>
<CAPTION>

                                                              Workforce    Facility     Towing
                                                              Reduction    Closings    and Other    Total
                                                              ---------    --------    ---------    -----
                                                                              (in thousands)
<S>                                                            <C>         <C>         <C>         <C>
       Special charges recorded in first quarter of 2001.....  $  2,376    $  1,739    $   1,932   $ 6,047
       Utilization of accrual in 2001........................    (1,878)     (1,016)      (1,067)   (3,961)
       Adjustments recorded in the fourth quarter of 2001....      (423)        838         (815)
                                                               --------    --------    ---------
                                                                                                      (400)
       Total accrued special charges at December 30, 2001      $     75    $  1,561    $      50   $ 1,686
       Additional accrual - gain on sale of asset                    --          --           21        21
       Utilization of accrual in 2002........................       (75)       (530)          --      (605)
                                                               --------    --------    ---------   -------
       Total accrued special charges at June 30, 2002........  $      -    $  1,031    $      71   $ 1,102
                                                               ========    ========    =========   =======
</TABLE>


       As of June 30, 2002, $1.0 million of accrued special charges were
       classified as current liabilities and $0.1 million was classified as a
       component of other liabilities.


3.     INCOME TAXES

       Income taxes were computed using the effective tax rate estimated to be
       applicable for the full fiscal year, which is subject to ongoing review
       and evaluation by the Company.

4.     GOODWILL AND INTANGIBLES

       Beginning in 2002, the Company no longer amortizes goodwill or any
       intangible assets with indefinite lives, in accordance with Statement of
       Financial Accounting Standards ("SFAS") No. 142. Instead, the Company
       tests these assets for impairment annually or when certain impairment
       indicators exist. In the six months ended July 1, 2001, the Company
       recorded amortization expense related to intangible assets, primarily
       goodwill, of $2.0 million. In the six months ended June 30, 2002, the
       Company recorded amortization of identifiable intangible assets of $0.1
       million. In accordance with Statement No. 142, the Company completed the
       transitional impairment test of intangible assets during the second
       quarter of fiscal 2002. The results of this impairment test indicate no
       adjustment is required.

       The following table sets forth the intangible assets by major asset class
as of June 30, 2002:

                  Amortized intangibles (in thousands):
                  Covenants not to compete                             $ 2,717
                  Accumulated amortization                              (1,234)
                                                                        ------
                  Net intangibles                                      $ 1,483
                                                                       =======


                                       7


<PAGE>


       The following table reflects the consolidated results adjusted as though
       the adoption of Statement No. 142 occurred at the beginning of the
       six-month period ended July 1, 2001.

<TABLE>
<CAPTION>

                                                        THREE MONTHS ENDED         SIX MONTHS ENDED
                                                        -------------------     ---------------------
                                                       JUNE 30,     JULY 1,     JUNE 30,      JULY 1,
                                                         2002         2001        2002          2001
                                                       --------     -------     ---------------------
                                                       (dollars in thousands except per share amounts)
<S>                                                    <C>          <C>         <C>           <C>

       Net income:
           As reported                                 $  1,356     $ 2,171     $  2,868      $   526
           Goodwill amortization, net of tax effect           -         573            -        1,146
                                                       --------     -------     --------      -------
       Adjusted net income                             $  1,356     $ 2,744     $  2,868      $ 1,672
                                                       ========     =======     ========      =======

       Basic earnings per share:
           As reported                                 $    .11     $   .18     $    .23      $   .04
           Goodwill amortization, net of tax effect           -         .05            -          .10
                                                       --------     -------     --------      -------
       Adjusted basic net income per share             $    .11     $   .23     $    .23      $   .14
                                                       ========     =======     ========      =======

       Diluted earnings per share:
           As reported                                 $    .11     $   .18     $    .23      $   .04
           Goodwill amortization, net of tax effect           -         .05            -          .10
                                                       --------     -------     --------      -------
       Adjusted diluted net income per share           $    .11     $   .23     $    .23      $   .14
                                                       ========     =======     ========      =======
</TABLE>



5.     FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

       The Company, as a matter of policy, does not enter into derivative
       contracts for trading or speculative purposes. During the first quarter
       of 2002, the Company entered into an interest rate swap to mitigate its
       exposure to interest rate fluctuations. The interest rate swap agreement
       has a notional amount of $30.0 million under which the Company pays a
       fixed rate of interest of 5.6% and receives a LIBOR-based floating rate.
       At June 30, 2002, the Company recorded a non-cash charge of $0.5 million
       related to the change in fair value for a portion of its interest rate
       swap agreement which does not qualify for hedge accounting. The Company
       also recorded $0.1 million as a comprehensive loss related to the change
       in fair value of the remaining portion of its interest rate swap
       agreement which qualifies for hedge accounting.

6.     COMPREHENSIVE INCOME

       Comprehensive income consists of net earnings and the change in fair
       value of the Company's interest rate swap agreement as follows (in
       thousands):

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED        SIX MONTHS ENDED
                                                       --------------------     ---------------------
                                                       JUNE 30,     JULY 1,     JUNE 30,      JULY 1,
                                                          2002       2001          2002        2001
                                                       --------     -------     ---------------------
<S>                                                    <C>          <C>         <C>           <C>
       Net earnings                                    $  1,356     $ 2,171     $  2,868      $   526
       Other comprehensive income - net of tax
            Change in fair value of interest rate
              swap agreement                               (109)          -         (109)           -
                                                       --------     -------     --------      -------
       Comprehensive income                            $  1,247     $ 2,171     $  2,759      $   526
                                                       ========     =======     ========      =======

</TABLE>


       The change in fair value of the Company's interest rate swap agreement
       for the six-month period ended June 30, 2002 was due to a decline in
       interest rates.


                                       8


<PAGE>




Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

The discussion in this section contains forward-looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected, expressed, or implied by such
forward-looking information. In some cases, you can identify forward looking
statements by our use of words such as "may, will, should, anticipates,
believes, expects, plans, future, intends, could, estimate, predict, projects,
targeting, potential or contingent," the negative of these terms or other
similar expressions. The Company's actual results could differ materially from
those discussed or implied herein. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed herein under
"Factors that May Affect Future Results" and the Company's annual report on Form
10-K for the fiscal year ended December 30, 2001.


OVERVIEW

         Insurance Auto Auctions, Inc. offers insurance companies and other
vehicle suppliers cost-effective salvage processing solutions principally on
either a consignment or purchase agreement method of sale. The consignment
method includes both a percentage of sale and fixed fee basis. The percentage of
sale consignment method offers potentially increased profits over fixed fee
consignment by providing incentives to both the Company and the salvage provider
to invest in vehicle enhancements, thereby maximizing vehicle selling prices.
Under the percentage of sale and fixed fee consignment methods, the vehicle is
not owned by the Company and only the fees associated with processing the
vehicle are recorded as revenue. The proceeds from the sale of the vehicle
itself are not included in revenue. Under the purchase agreement sales method,
the vehicle is owned by the Company, and the proceeds from the sale of the
vehicle are recorded as revenue.

         Since its initial public offering in 1991, the Company has grown
primarily through a series of acquisitions and opening of new sites to now
include 65 sites. In June 2002, the Company announced the opening of a new
branch operation in Duluth, Minnesota and more recently, in July 2002, announced
the acquisition of Southern Missouri Insurance Pool located in Springfield,
Missouri.

         The Company's operating results are subject to fluctuations, including
quarterly fluctuations, that can result from a number of factors, some of which
are more significant for sales under the purchase agreement method. See "Factors
That May Affect Future Results" below for a further discussion of some of the
factors that affect or could affect the Company's business, operating results
and financial condition.


CRITICAL ACCOUNTING POLICIES

         The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the related disclosures.
The Company bases its estimates on historical experience and on various
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. As such, the Company
continuously evaluates its estimates. The Company believes the following
critical accounting policies are directly affected by the more significant
judgments and estimates used in the preparation of its consolidated financial
statements.

GOODWILL

         The Company has significant goodwill recorded in its consolidated
financial statements. The Financial Accounting Standards Board has issued new
pronouncements affecting goodwill and intangible assets. In accordance with the
new standards, the Company assesses goodwill for possible impairment on an
annual basis or whenever events or changes in circumstances indicate that the
carrying value of this


                                       9


<PAGE>



asset may not be recoverable. Important factors that could trigger an impairment
review include significant under-performance relative to expected historical or
projected future operating results; significant negative industry or economic
trends; significant decline in the Company's stock price for a sustained period;
and a significant decline in the Company's market capitalization relative to net
book value. If the Company determines that the carrying value of goodwill may
not be recoverable based upon the existence of one or more of the above
indicators of impairment, the Company would measure any impairment by comparing
the implied value of goodwill with the carrying amount of that goodwill. In
accordance with Statement No. 142, the Company completed the transitional
impairment test for goodwill during the second quarter of fiscal 2002. This test
indicated no adjustment was required.

DEFERRED INCOME TAXES

         The Company has determined that it may not realize the full tax benefit
related to the deferred tax asset. As such, a valuation allowance to reduce the
carrying value of the deferred tax asset has been recorded.


RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED
JULY 1, 2001

         Revenues decreased 20.8% to $59.8 million for the three months ended
June 30, 2002, from $75.5 million for the same three month period in 2001. The
decline in revenues is primarily due to the Company's continued shift away from
vehicles sold under the purchase agreement method. Under the purchase agreement
method, the entire purchase price of the vehicle is recorded as revenue compared
to only recording the fees collected on the sale of a vehicle under the lower
risk consignment fee based arrangements. Vehicles sold under the purchase
agreement method accounted for 9.0% of the total vehicles sold in the second
quarter of 2002, versus 20.5% for the same quarter last year. This change in
contract mix also contributed to the significant increase in fee income for the
quarter. Fee income in the second quarter increased 10.6% to $42.7 million
versus $38.6 million in the second quarter of last year. Gross proceeds from the
sale of salvage vehicles at auction were $196.0 million during the three months
ended June 30, 2002, an increase of $24.4 million, or 14.2% over the same period
last year.

         Cost of sales decreased $15.8 million to $47.8 million for the three
months ended June 30, 2002, versus $63.6 million for the same period last year.
Vehicle cost of $14.8 million is $19.9 million less than last year's amount of
$34.7 million. This decrease is primarily related to the Company's shift away
from vehicles sold under the purchase agreement method. Branch cost of $33.0
million increased $4.1 million from $28.9 million for the same period last year.
Branch costs reflect an improvement in labor expense from the first quarter that
was more than offset by higher tow and real estate expenses.

         Gross profit of $11.9 million for the three months ended June 30, 2002
was unchanged from last year's comparable period.

         Selling, general and administrative expense of $6.9 million is slightly
less than the expense of $7.0 million in the second quarter of last year.

         Amortization of intangible assets decreased significantly from $1.0
million in the second quarter of last year to $0.1 million in the current year
period. See Note 4 of the notes to condensed consolidated financial statements
herein for further discussion of this change.

         Business transformation costs for the three months ended June 30, 2002
were $2.2 million versus $0.1 million in the same period last year. Business
transformation costs include expenses related to the systems redesign project,
the business process re-engineering project, severance costs and accelerated
depreciation associated with the Company's existing computer infrastructure. In
the second quarter of 2002, the most significant components of business
transformation costs are related to implementation of the business process
re-engineering in the remaining branches and the new system redesign project.
Both the system redesign and business process re-engineering projects started in
2001.



                                       10


<PAGE>



         Interest expense of $0.5 million for the three months ended June 30,
2002, was unchanged from the comparable period in 2001. Interest income
decreased to $0.1 million for the 2002 second quarter versus $0.3 million for
the 2001 second quarter. Included in interest expense for the three months ended
June 30, 2002, was a non-cash charge of $0.5 million to recognize the cost of
the interest rate swap on the Company's unused credit facility. In February
2002, the Company repaid its $20.0 million of Senior Notes bearing a fixed rate
of interest at 8.6%, and entered into a new $30.0 million five-year unsecured
credit facility. At June 30, 2002, there was no outstanding balance related to
this credit facility. The Company used excess cash and proceeds from investments
to repay its $20.0 million 8.6% Senior Notes that matured on February 15, 2002.

         The Company's effective income tax rate was 43% and 41% in 2002 and
2001, respectively.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JULY 1, 2001

         Revenues decreased to $129.0 million for the six months ended June 30,
2002, from $153.4 million for the same six month period in 2001, a 15.9%
decrease. The decline in revenues is primarily due to the Company's continued
shift away from vehicles sold under the purchase agreement method. Vehicles sold
under the purchase agreement method accounted for 10.9% of the total vehicles
sold in the first six months of 2002, versus 20.6% for the same period last
year. This change in contract mix also contributed to the significant increase
in fee income for the six month period. Fee income for the six months ended June
30, 2002, increased 10.5% to $84.2 million versus $76.2 million for the same six
month period in 2001. Gross proceeds from the sale of salvage vehicles at
auction were $391.2 million during the six months ended June 30, 2002, an
increase of $47.7 million, or 13.9% over the six months ended July 1, 2001.

         Cost of sales decreased $25.0 million to $105.0 million for the six
months ended June 30, 2002, versus $130.0 million for the same period last year.
Vehicle cost of $40.9 million is $31.0 million less than last year's amount of
$71.9 million. This decrease is primarily related to the Company's shift away
from vehicles sold under the purchase agreement method. Branch cost of $64.2
million increased $6.2 million from $58.0 million for the same period last year.
This increase is the result of incremental variable cost associated with higher
unit volumes along with operating costs related to new branch facilities.

         Gross profit increased 2.1% to $23.9 million for the six months ended
June 30, 2002, from $23.4 million for the comparable period in 2001.

         Selling, general and administrative expense of $14.0 million for the
six months ended June 30, 2002 is unchanged from the same period in 2001.

         Amortization of intangible assets decreased significantly from $2.0
million in the first six months of last year to $0.1 million in the current year
period. See Note 4 of notes to condensed consolidated financial statements
herein for further discussion of this change.

         Business transformation costs for the six months ended June 30, 2002
were $4.2 million versus $0.1 million in the same period last year. Business
transformation costs include expenses related to the systems redesign project,
the business process re-engineering project, severance costs and accelerated
depreciation associated with the Company's existing computer infrastructure. The
Company began recording business transformation costs during the second quarter
of 2001.

         Interest expense decreased to $0.7 million for the six months ended
June 30, 2002, from $0.9 million for the comparable period in 2001. Interest
income decreased to $0.1 million for 2002 from $0.7 million in 2001. In February
2002, the Company repaid its $20.0 million of Senior Notes bearing a fixed rate
of interest at 8.6%, and entered into a new $30.0 million five-year unsecured
credit facility. Interest expense in 2002 includes a $0.5 million non-cash
charge related to the Company's interest rate swap associated with the new line
of credit.

         The Company's effective income tax rate was 43% and 42% in 2002 and
2001, respectively.



                                       11

<PAGE>



FINANCIAL CONDITION AND LIQUIDITY

         At June 30, 2002, the Company had current assets of $74.4 million,
which includes $18.6 million of cash and cash equivalents. Current liabilities
were $45.8 million. The Company had working capital of $28.6 million at June 30,
2002, a $3.4 million increase from December 30, 2001.

         At June 30, 2002, the Company's long-term debt consisted of $0.1
million in notes payable, bearing interest at a rate of 8.0%. Other long-term
liabilities include a post-retirement benefits liability that relates to the
acquisition in 1994 of Underwriters Salvage Company. The amount recorded at June
30, 2002 for the post-retirement benefits liability is approximately $2.8
million. The remaining balance within other long-term liabilities represents the
loss amount relating to the change in fair value of the Company's interest rate
swap agreement.

         In the second quarter of 2002, the Company entered into a capital lease
arrangements to secure new computer equipment required as part of the Company's
new operating system. The capital lease terms are for three years or less
depending on the nature of the equipment.

         In February 2002, the Company's $20.0 million Senior Notes matured.
This debt was repaid with available cash and proceeds from investments. The
Company also entered into a new five-year $20.0 million unsecured credit
facility that was expanded to $30.0 million in the second quarter of 2002. The
credit facility is a one-year revolver that converts into a four-year term loan
carrying a variable rate based on LIBOR. During the first quarter of 2002, the
Company entered into an interest rate swap to mitigate its exposure to interest
rate fluctuations.

         Capital expenditures were $6.6 million for the six months ended June
30, 2002. These capital expenditures include capitalization of certain
development costs related to the Company's new information system, along with
various branch improvements including upgrades to existing branches and the
addition of capacity in key markets.

         In September 2000, the Company's Board of Directors authorized the
purchase of up to 1,500,000 shares of its common stock. Purchases may be made
from time to time in the open market, subject to the requirements of applicable
laws, and if made will be financed with existing cash and cash equivalents,
marketable securities, and cash from operations. As of June 30, 2002, the
Company had not purchased any shares pursuant to this authorization.

         The Company believes that cash generated from operations will be
sufficient to fund capital expenditures and provide adequate working capital for
operations for the next twelve months. Part of the Company's plan is to pursue
continued growth, possibly through new facility start-ups, acquisitions, and the
development of new claims processing services. At some time in the future, the
Company may require additional financing. There can be no assurance that
additional financing, if required, will be available on favorable terms.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         The Company operates in a changing environment that involves a number
of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.

         Quarterly Fluctuations. The Company's operating results have in the
past and may in the future fluctuate significantly depending on a number of
factors, some of which are more significant for sales under the purchase
agreement method. These factors include, but are not limited to: fluctuations in
Actual Cash Value ("ACV" - the estimated pre-accident fair value of the vehicle)
of salvage vehicles, changes in the market value of salvage vehicles, delays or
changes in state title processing, general weather conditions, changes in
regulations governing the processing of salvage vehicles, and attendance at
salvage auctions. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance. In addition,
revenues for any future quarter are not predictable with any significant degree
of accuracy, while the Company's expense levels are relatively fixed. If revenue
levels are below expectations, operating results are likely to be adversely
affected. Due to all of the foregoing factors, it is likely that in some future



                                       12


<PAGE>

quarters the Company's operating results will be below the expectations of
public market analysts and investors.

         Quality and Quantity of Inventory Available from Suppliers. The Company
is dependent upon receiving a sufficient number of total-loss vehicles as well
as recovered theft vehicles to sustain its profit margins. Factors which can
affect the number of salvage vehicles received include the reduction of policy
writing by insurance providers, which would affect the number of claims over a
period of time, and changes in direct repair procedures that would reduce the
number of newer less-damaged total-loss vehicles that tend to have higher
salvage values. Decreases in the quality and quantity of inventory, and in
particular the availability of newer and less-damaged vehicles, may negatively
impact further the purchase agreement method of sale and may have a material
adverse effect on the operating results and financial condition of the Company.

         Competition. Historically, the automotive salvage industry has been
highly fragmented. The Company faces intense competition for the supply of
salvage vehicles from vehicle suppliers, as well as competition from processors
of vehicles from other salvage pools. Regional salvage pools generally process
vehicles under the fixed fee consignment method and generally do not offer the
full range of services provided by the Company. The Company believes that
publicly-held, Copart, Inc. is a significant competitor. Copart has completed a
number of acquisitions of regional salvage pools and competes with IAA in most
of IAA's geographic markets. Due to the limited number of vehicle suppliers,
competition is intense for salvage vehicles from Copart and regional suppliers.
It is also possible that the Company may encounter further competition from
existing competitors and new market entrants that are significantly larger and
have greater financial and marketing resources. One such competitor is ADESA
Corporation, a subsidiary of Allete Inc. During 2001, ADESA acquired Auto
Placement Centers ("APC") which provided vehicle recovery services with auction
facilities in the Northeast United States. Other potential competitors could
include used car auction companies, providers of claims software to insurance
companies, certain salvage buyer groups and insurance companies, some of which
presently supply auto salvage to the Company. While most insurance companies
have abandoned or reduced efforts to sell salvage without the use of service
providers such as the Company, they may in the future decide to dispose of their
salvage directly to end users. There can be no assurance that the Company will
be able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its operating results and financial condition.

         Dependence on Key Insurance Company Suppliers. Historically, a limited
number of insurance companies has accounted for a substantial portion of the
Company's revenues. For example, in 2001, vehicles supplied by the Company's
three largest suppliers accounted for approximately 39.0% of the Company's unit
sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and
Allstate, each accounted for approximately 15.0%, 15.0%, and 9.0%, respectively,
of the Company's unit sales. A loss or reduction in the number of vehicles from
any of these suppliers, or adverse change in the agreements that such suppliers
have with the Company, could have a material adverse effect on the Company's
operating results and financial condition.

         Purchase Agreement Method. Under the purchase agreement method of sale,
the Company is required to purchase, and the insurance company and other
non-insurance company suppliers are required to sell to the Company, virtually
all total-loss and recovered theft vehicles generated by the supplier in a
designated geographic area. The agreements are customized to each supplier's
needs, but typically require the Company to pay a specified percentage of a
vehicle's ACV, depending on the vehicle's age and certain other conditions,
including whether the vehicle is a total-loss or a recovered theft vehicle. IAA
assumes the risk of market price variation for vehicles sold under a purchase
agreement, and therefore works to enhance the value of purchased vehicles in the
selling process. Because the Company's purchase price is fixed by contract,
changes in ACVs or in the market or auction prices for salvage vehicles have an
impact on the profitability of the sale of vehicles under the purchase agreement
method. If increases in used car prices and ACVs are not associated with a
corresponding increase in prices at salvage auctions, there can be a negative
impact on the profitability of purchase agreement sales. Revenue recorded from
the sale of a purchase agreement vehicle is the actual selling price of the
vehicle. In 2001 and 2000, respectively, approximately 19.0% and 26.0% of the
units processed by the Company were processed through the purchase agreement
method of sale.


                                       13


<PAGE>


         Beginning late in the second quarter of 2000 and continuing in 2001,
purchase agreement profitability was impaired by a combination of rising ACVs
and flat to lower sale prices at auctions in certain areas of the country.
Further increases in ACVs or declines in the market or auction prices for
salvage vehicles could have a material adverse effect on the Company's operating
results and financial condition. The Company has included adjustment and
risk-sharing clauses in certain of its purchase agreement contracts to provide
some protection to the Company and its customers from unexpected, significant
changes in ACVs that are not accompanied by a comparable increase in sales
prices. By the end of 2001, the Company began exiting many of its purchase
agreement contracts. The Company has renegotiated certain purchase agreements,
converting them to either the percent of sale or fixed fee consignment method of
sale. As of the second quarter 2002, the Company continues to shift away from
vehicles sold under the purchase agreement method. Vehicles sold under the
purchase agreement method accounted for 10.9% of all vehicles sold through June
30, 2002 versus 20.6% of all vehicles sold in the first six months of 2001. The
Company expects that approximately 10.0% of total units sold in 2002 will be
sold under the purchase agreement method of sale.

         Business Process Re-engineering Project. During the third quarter 2001,
the Company retained Synergetics Installations Worldwide, a consulting firm
based in New Hampshire, to assist the Company in its process of creating and
applying new standards and best practices in an effort to improve operational
efficiency, standardize processes, and implement tools to measure performance
within critical areas of field operations. At the end of the fourth quarter, the
Company completed its best practices model. In the first quarter 2002, the
Company began rolling out the new procedures in approximately one half of its
branches. The Company completed the rollout of the procedures before the end of
the second quarter 2002. The Company has temporarily retained a small number of
Synergetics employees working together with a task force of Company employees to
ensure uniform compliance with the new procedures in the branches. This task
force should complete its operational audit of the branches by the end of the
fiscal year 2002. The total costs of Synergetics' services should be
approximately $2.5 million. The Company anticipates cost savings of at least
$5.0 million a year resulting from this project.

         Enterprise-Wide System Redesign Project. Also in 2001, the Company
retained the services of SEI Information Technology to develop a new
enterprise-wide application to manage the salvage and auction process. The new
Web-based system will support and streamline vehicle registration and tracking,
financial reporting, transaction settlement, vehicle title transfer, and
branch/headquarters communications. It will speed all aspects of the Company's
operations, support growth and expansion plans, provide improved reliability and
maintainability, and ultimately, deliver increased profits. The estimated cost
of $10.0 million includes equipment, telecom, training, and implementation along
with application development. The Company projects cost savings from the
Business Process Re-engineering Project and the Enterprise-Wide System Redesign
Project at a minimum of $10.0 million, and potentially as much as $15.0 million
annually, from the two projects combined. Development of the application began
in the third quarter of 2001 and continued through the second quarter 2002. The
Company began rolling out the new system to its branches during the second
quarter in its Appleton, Wisconsin branch and expects to complete the roll out
in the remaining branches by the end of the year. As of the end of the second
quarter 2002, the Company remains on target for meeting its objectives with
respect to these two projects. There are, however, inherent risks including but
not limited to conversion of data, telecom infrastructure and the decline in
productivity during the rollout period associated with both projects that could
adversely impact the Company's expected results as they relate to timing, costs
and cost savings

         Governmental Regulation. The Company's operations are subject to
regulation, supervision and licensing under various federal, state and local
statutes, ordinances and regulations. The acquisition and sale of totaled and
recovered theft vehicles is regulated by state motor vehicle departments in each
of the locations in which the Company operates. Changes in law or governmental
regulations or interpretations of existing law or regulations can result in
increased costs, reduced salvage vehicle prices and decreased profitability for
the Company. In addition to the regulation of sales and acquisitions of
vehicles, the Company is also subject to various local zoning requirements with
regard to the location of its auction and storage facilities. These zoning
requirements vary from location to location and may prevent the Company from
entering into or remaining in markets deemed desirable. Failure to comply with
present or future regulations or changes in existing regulations could have a
material adverse effect on the Company's operating results and financial
condition.


                                       14


<PAGE>


         Provision of Services as a National or Regional Supplier. The provision
of services to insurance company suppliers on a national or regional basis
requires that the Company expend resources and dedicate management to a small
number of individual accounts, resulting in a significant amount of fixed costs.
The operation of a referral based national network service, in particular, has
required the devotion of financial resources without immediate reimbursement of
such expenses by the insurance company suppliers.

         Expansion and Integration of Facilities. The Company seeks to increase
sales and profitability through acquisition of other salvage auction facilities,
new site expansion and the increase of salvage vehicle volume at existing
facilities. There can be no assurance that the Company will continue to acquire
new facilities on terms economical to the Company or that the Company will be
able to add additional facilities on terms economical to the Company or that the
Company will be able to increase revenues at newly acquired facilities above
levels realized prior to acquisition. The Company's ability to achieve these
objectives is dependent on, among other things, the integration of new
facilities, and their information systems, into its existing operations, the
identification and lease of suitable premises, and the availability of capital.
There can be no assurance that this integration will occur, that suitable
premises will be identified or that additional capital will be available to fund
expansion and integration of the Company's business. Any delays or obstacles in
this integration process could have a material adverse effect on the Company's
operating results and financial condition. Furthermore, the Company does not
have unlimited sources of additional capital available for acquisitions,
expansions and start-ups. The Company's ability to integrate and expand its
facilities will depend on its ability to identify and obtain additional sources
of capital to finance such integration and expansion. In the future, the Company
will be required to continue to improve its financial and management controls,
reporting systems and procedures on a timely basis and expand, train and manage
its employee work force. The failure to improve these systems on a timely basis
and to successfully expand and train the Company's work force could have a
material adverse effect on the Company's operating results and financial
condition.

         Volatility of Stock Price. The market price of the Company's common
stock has been and could continue to be subject to significant fluctuations in
response to various factors and events, including variations in the Company's
operating results, the timing and size of acquisitions and facility openings,
the loss of vehicle suppliers or buyers, the announcement of new vehicle supply
agreements by the Company or its competitors, changes in regulations governing
the Company's operations or its vehicle suppliers, environmental problems or
litigation.

         Environmental Regulation. The Company's operations are subject to
federal, state and local laws and regulations regarding environmental
protection. In the salvage vehicle auction industry, large numbers of wrecked
vehicles are stored at auction facilities. While being stored, minor spills of
fuel, motor oils and other fluids may occur resulting in possible soil, surface
water or groundwater contamination. Certain of the Company's facilities may also
generate and/or store petroleum products and other hazardous materials like
waste solvents and used oils. Expenditures for preventative, investigative or
remedial action may occur and the Company may be exposed to liability arising
from its operations, contamination by previous users of certain acquired
facilities or the disposal of waste at off-site locations. The Company believes
that it is in compliance in all material respects with applicable environmental
regulations and does not anticipate any material capital expenditure for
environmental compliance or remediation. Environmental laws and regulations,
could become more stringent, however, and there can be no assurance that future
expenditures or liabilities for preventative or remedial action would not have a
material adverse effect on our results of operations and financial condition.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company's investments are exposed to certain market risks inherent
with such assets. This risk is mitigated by the Company's policy of investing in
securities with high credit ratings and investing through major financial
institutions with high credit ratings. At June 30, 2002, the Company did not
have any outstanding investments.

         The Company is exposed to interest rate fluctuations on its floating
rate $30 million credit facility. As of June 30, 2002, the Company did not have
any outstanding balance related to this credit facility. The Company has entered
into a interest rate swap to mitigate its exposure to interest rate
fluctuations, and does not, as a matter of policy, enter into hedging contracts
for trading or speculative purposes. The interest rate


                                       15



<PAGE>



swap agreement has a notional amount of $30.0 million under which the Company
pays a fixed rate of interest of 5.6% and receives a LIBOR-based floating rate.
At June 30, 2002, the Company recorded a non-cash charge of $0.5 million related
to the change in fair value for a portion of its interest rate swap agreement.
This portion of the swap agreement does not qualify for hedge accounting. The
Company also recorded a $0.1 million accumulated comprehensive loss related to
the change in fair value of the remaining portion of its interest rate swap
agreement. This portion of the swap agreement does qualify for hedge accounting.

PART II.  OTHER INFORMATION.

ITEM 1.  LEGAL PROCEEDINGS.  Inapplicable
         ------------------

ITEM 2.  CHANGES IN SECURITIES.  Inapplicable
         ----------------------

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.  Inapplicable
         --------------------------------

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
         ----------------------------------------------------

                At the Annual Meeting of Shareholders of the Company held June
         19, 2002 the shareholders (i) elected eight directors to serve on the
         Company's Board of Directors, (ii) approved the adoption of an
         amendment to the Company's Amended and Restated 1991 Stock Option Plan
         increasing the number of shares of common stock reserved for issuance
         there under by 750,000 shares, and (iii) ratified the Company's
         appointment of KPMG LLP to serve as the Company's independent auditors
         for the fiscal year ending December 29, 2002. Shareholders holding
         11,606,783 shares of Common Stock, representing 94.99% of the total
         number of shares outstanding and entitled to vote at the meeting, were
         present in person or by proxy at the meeting.

             The vote for nominated directors was as follows:

             Director                       Votes for          Votes Withheld
             --------                       ---------          --------------
             Joseph F. Mazzella             10,792,831            813,952
             Thomas C. O'Brien              10,792,831            813,952
             Maurice A. Cocca               10,792,831            813,952
             Susan B. Gould                 10,792,831            813,952
             Peter H. Kamin                 10,792,831            813,952
             Melvin R. Martin               10,790,031            816,752
             Jeffrey W. Ubben               10,792,831            813,952
             John K. Wilcox                 10,792,731            814,052

             The vote to approve the adoption of an amendment to the Company's
         Amended and Restated  1991 Stock Option Plan was as follows:
         For: 6,347,005; Against: 4,354,953; Abstain: 53,352 and not
         voted: 851,473.

             The vote for ratifying the appointment of KPMG LLP as the
         Company's independent auditors for the fiscal year ending December 29,
         2002 was as follows: For: 11,605,621; Against: 989; and Abstain: 173.


ITEM 5.  OTHER INFORMATION.  Inapplicable
         ------------------

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.
         ---------------------------------

         (A) EXHIBITS.
             ---------

             10.1 Amended and Restated 1991 Stock Option Plan (incorporated by
                  reference from Exhibit 4.2 of the Registration Statement on
                  Form S-8 filed with the SEC on August 5, 2002 (File No.
                  33-97671).


             99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.

         (b) Reports on Form 8-K. No reports on Form 8-K were filed during the
             fiscal quarter ended June 30, 2002.

                                       16


<PAGE>



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                     INSURANCE AUTO AUCTIONS, INC.




Date: August 13, 2002                By:     /s/ Scott P. Pettit
      ---------------                   ---------------------------------------
                                     Name:   Scott P. Pettit
                                     Title:  Senior Vice President and
                                             Chief Financial Officer
                                             (Duly Authorized Officer and
                                             Principal Financial Officer)

                                       17


<PAGE>


                                  EXHIBIT INDEX



EXHIBIT NO.
-----------



99.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



                                       18